The present invention relates to trading systems for improving market liquidity, and more particularly, is directed to automating generation of an order in response to order flow information.
Securities trading is a highly competitive industry. Conventionally, sophisticated traders have computers running programs for monitoring market data information and, in response thereto, automatically generating orders and sending the orders to a marketplace for execution. The computer programs enable faster response to market conditions. However, the market data information that stimulates these computer programs consists of execution prices for trades that just occurred. Thus, conventional order generation programs are always reacting to historical information.
Recently, equities began trading on major markets in decimals, hundredths of a dollar, instead of eighths of a dollar. As expected, bid-ask quote spreads have narrowed. Contrary to expectations, the increasing market transparency has resulted in a decline in the quality of markets, measured by stability and volume. It appears that the narrow spread leaves inadequate room for market makers to profitably do business.
Another concern is that electronic communication networks (ECNs) typically pay a small fee, such as $0.001 per share, to parties who provide liquidity by entering orders for storage in the ECN, and charge a larger fee, such as $0.02 per share, to parties who execute against the stored orders. In some markets, it would be preferable to reverse the cost burden.
NYFIX Millennium (www.nyfix.com) is a computer system that enables users to contribute a pool of liquidity by passing their NYSE DOT (Designated Order Turnaround) and institutional block volume through Millennium on its way to the floor of the NYSE. This pass-through volume is allowed to interact with resting orders that can improve the price reflected on the NYSE by at least $0.01. If Millennium cannot improve price, the order is immediately sent on to its original destination for execution. Millennium limits users to bidding on incoming orders. Millennium's methodology is simply to look at incoming order flow. Millennium keeps the order's originator anonymous.
Instant Forwarding is a feature of NYFIX Millennium. If an order is sent to NYFIX Millennium and is not immediately executed in the System, thereby obtaining a better price that is available on an established market, the order is instantly routed to a secondary destination predetermined by the trader. In most ECNs, if an order is not immediately executed, the order is “stranded” there, waiting for either an execution or cancellation. The problem with that scenario is that while an order is waiting in an ECN, a better price may be available in the primary market which a trader would not be able to take advantage of without first canceling his/her order.
Anonymous matching is another feature of NYFIX Millennium. Traders can expose large blocks of stock to the constant liquidity pool flowing back and forth over the NYFIX Network and be able to receive executions, with no one ever seeing their orders. An Institution will never have to reveal that it is trying to accumulate or sell a position. Throughout the post-trade and clearing stages of the execution process, buyers and sellers remain completely anonymous.
Intelligent Order Routing (IOR) is a service of NYFIX Millennium. For smaller orders, if NYFIX Millennium is unable to obtain a better price, the IOR functionality sends that order, in real-time, to the execution venue statistically most likely to improve the price. NYFIX Millennium analyzes the statistics of price improvement and expects to increase them by leveraging all the different execution points and determining, for each individual order, where the best price is usually achieved. This function provides a client with two chances at achieving a better price that the displayed national best bid or offer, first NYFIX Millennium, and second, through IOR.
NYFIX Millennium operates with two basic order types: pass-through orders and conditional orders. Pass-through orders are those that pass-through NYFIX Millennium on their way to another liquidity source, such as a primary or regional exchange, third market firm or ECN. If a match can be found within Millennium, an execution is sent back to the trader is real-time. If no match is found, the order merely “passes through” NYFIX Millennium and continues on to the predetermined destination. Conditional orders provide a mechanism for larger, institutional-size orders to be anonymously and invisibly exposed to the marketplace. Entering conditional orders into NYFIX Millennium enables traders to specify various trading conditions that will trigger an execution when particular conditions are met. Conditional orders can be crossed with pass-through or other conditional orders. NYFIX Millennium has proposed offering users the ability to place orders at the opening, closing and volume weighted average price (VWAP).
Harborside Plus (www.harborsideplus.com) is a block trading system that accepts an indication of interest (IOI) from a trader, and stores the IOI. An IOI represents a willingness to trade a particular size, with the minimum being 25,000 shares. Only the side and symbol are required, limits are optional. The actual order size is never sent. When the system identifies a match between counterparties, the buyer and seller are both notified by telephone and a negotiation begins. The Harborside Plus trading desk facilitates the negotiation, such as by providing the national best bide and offer midpoint price at the time of the match as a reference point. The buyer and seller identities remain completely confidential When the buyer and seller reach agreement, the trade is reported by Harborside Securities.
Liquid Net (www.liquidnet.com) is an alternative trading system (ATS) for buy-side institutions in the United States. Liquidnet brings natural buyers and sellers together and enables them to anonymously negotiate trades among each other, without intermediaries or information leaks. The Liquidnet system brings liquidity to the trader, reversing the current paradigm of searching for liquidity. Liquidnet offer complete anonymity—buyers' and sellers' identities are never revealed, even after a trade is completed. Liquidnet orders are matched based on quantity parameters continuously throughout the day, i.e., quantity discovery rather than price discovery. Liquidnet assumes anonymous, one-on-one negotiations that enable traders to maintain complete control of execution price and quantity.
The term “best execution” is most accurately described as delivering the execution that best suits the client's needs, that may vary from simply obtaining the best price on a single trade, to maintaining anonymity, to speed of execution, to reduction of price dis-improvement. Due to the varying and sometimes contradictory constraints imposed by traders and markets, there is room to improve the ability of order generation programs to interact with the market.